Why do we study token economics?
For all kinds of Web3 projects, a perfect token economic model is the key to success. Therefore, the token economic model should be carefully designed when developing a project to ensure the long-term sustainable development of the project.
For ordinary users, carefully evaluating the token economics of a project before deciding to participate in it is a critical step. Only by fully understanding the project itself can you increase the success rate of your investment.
The DePin leader Roam, which we analyzed before, announced its token economics. We can use this project to see how to analyze the pros and cons of a token model. @weRoamxyz
(The following mind map is a summary of Roam token economics)
The token economic model can be analyzed mainly from four dimensions: token supply (supply side), token utility (demand side), token distribution (holder status), and token governance (long-term ecology).
1. Token Supply
There are four core indicators for evaluating token supply:
(1) Maximum supply: the upper limit of the number of tokens specified in the preset code;
(2) Circulation: the number of tokens in circulation; (The number of circulating tokens is mainly affected by two factors: the release schedule of the development team and investors and the incentives of the ecosystem)
(3) Current market value: current price * circulation volume
(4) Fully diluted market capitalization: current price * maximum supply (if the price of a new project is hyped up very high, or even its fully diluted market capitalization exceeds that of Bitcoin, the industry benchmark, then this price will be difficult to maintain)
Another important dimension that affects the token supply is the token destruction mechanism: continuously reducing the token supply is deflation; conversely, continuously expanding the token supply is inflation.
Let's look at Roam again.
The total supply is 1 billion (1B) $ROAM tokens;
120 million (M) is reserved for the team and will be distributed over 6 years, which shows that the team wants to do this project for a long time;
280 million (280M) are allocated to past and future investors, with airdrops also deducted from this amount. This is the actual initial circulation amount.
The remaining 600 million (600M) is generated through mining, which means that you can continue to participate in this project in the future and avoid a wave of losses after the coin is listed.
The project owner also mentioned that the tokens will be repurchased through business income in the future.
Therefore, overall, Roam is deflationary, which is also a very strong value support.
2. Token Utility
Token utility represents the value of the token, whether it has actual usage scenarios, and whether it can attract more people to join, that is, the demand side of the token.
Token utility can be divided into three aspects:
(1) Practicality: Gas fees (typically represented by Ethereum, used to pay for computing power consumption) and real-world payments (typically represented by Bitcoin, which can be used for actual payments)
(2) Value accumulation: staking (security tokens, which can receive part of the product's profits), governance (governance tokens, where holders of governance tokens have the right to vote on changes to the token protocol)
(3) Meme and narrative: Meme refers to a culture or concept that is widely spread on the Internet due to its popularity. Dogecoin is the most typical meme coin. It has no practical value and became popular only because of the spoof emoticons.
Let’s take a look at Roam. The utility of its tokens is mainly used for related services within the ecosystem. It can be used to pay for network services, redeem free roaming data, or participate in other functions.
Relatively speaking, it still has strong value support and is not a useless air coin.
3. Token Distribution
There are two ways to launch and distribute tokens:
(1) Fair launch: A fair launch means that no one gets to buy the tokens first or a small number of tokens are distributed before the tokens are minted and distributed to the public. A typical example is Bitcoin.
(2) Pre-mining and then launching: Pre-mining refers to the process of minting a portion of a cryptocurrency and allocating it to a specific group (founding team or investment institution) before it is made available to the public. Ethereum has carried out pre-mining.
Let’s take a look at Roam again. It is obviously not a fair launch, but an advance distribution. This is also in line with the business logic of VC coins. Investors still need to make money.
We also need to pay attention to who is holding the tokens: large institutions and individual investors behave differently.
Once you understand the type of entity holding a token, you can further infer how the holder is likely to trade, and how they trade will influence the value of the token.
On the other hand, we need to pay attention to whether the distribution of tokens is even: usually, a large number of tokens held by a few large institutions means greater risk.
If patient investors and the founding team hold a majority of tokens, holders’ interests are more aligned and long-term success is more likely.
The Web3 industry standard is to allocate at least 50% of tokens to the community, which effectively dilutes the ownership that the founding team and investors are able to retain.
We also need to understand the lock-up and release schedule of the tokens: whether a large number of tokens will enter circulation, thus putting downward pressure on the value of the token.
4. Token Governance
How to incentivize participants to ensure long-term sustainable development is the core issue of token economics.
Many Web3 projects will also add a staking mechanism to the token economic model.
Staking tokens can increase their value in two ways:
First, staking incentives mean locking up tokens for passive income, so the minimum value of a token is a multiple of the value of future rewards;
Second, locking up tokens so that they cannot be exchanged has the secondary effect of reducing market supply and increasing token prices.
Let’s take a look at Roam. In order to reduce the selling pressure after listing and lower the actual circulation volume, it also provides staking services, which can be said to be a standard feature.
Finally, let’s summarize:
The economic model design of Roam in this case is still very reasonable. It follows the principle of long-termism as a whole and is sustainable.
Only by controlling supply, increasing demand, and supporting it with a governance mechanism can the value of the token be maintained in the long run.
We can find that a good token economic model must have three major elements:
(1) Reasonable staking mechanism: Staking can bind the interests of users to the value of the project and regulate the supply of tokens. Curve’s VE staking model has been proven to be relatively superior.
(2) More application scenarios: This is the biggest problem faced by every project. The expansion of application scenarios must be based on the growth of the business itself.
(3) Steadily growing business revenue: Although token incentives can attract new users, the Ponzi model will collapse sooner or later, so the key lies in whether the business itself can create value;
The token economic model is very important, but everything depends on the business value itself, otherwise it is just "air coin" with no value.
At present, the token economic model is still innovating rapidly and changing very quickly. You can continue to pay attention to whether there are new token models appearing on the market.
But in general, no matter how things change, the essence remains the same. The token economic model can be analyzed from four dimensions: supply, demand, distribution, and governance.
